Charles Schwab Corp. has launched a series of low-cost target date funds (TDFs). They are priced two basis points below TDF offerings by rivals Fidelity Investments and Vanguard. Target-date funds are designed to mature at a specific point in the future. The portfolios of these funds become more conservatively invested the closer they are to their target dates, and then will primarily focus on capital preservation with perhaps a bit of growth and income.
Target Index Funds
Schwab’s Target Index Funds, which are made up of a collection of exchange-traded funds (ETFs) with passive management, cost investors only eight basis points for retirement plans and have no minimum purchase amount. These TDFs will also be available to retail investors at a cost of 13 basis points. Schwab is one of the industry’s fastest growing providers of ETFs, and these TDFs represent a larger effort to capture more assets in the retirement plan market. (For more, see: When to Use Target-Date Funds.)
Research firm Cerulli Associates projects that 90% of all new retirement plan contributions will end up in target date funds by the end of the decade, which makes capturing this market a high priority for fund companies. These contributions will be fueled by automatic enrollment combined with an emphasis on passive investing. For this reason, several other major fund companies have offered low-cost TDFs, such as the Fidelity Freedom Index and Vanguard Institutional Target Retirement funds, both of which cost investors 10 basis points. They were the two cheapest TDFs in the market before the Schwab offering, and other fund giants such as Blackrock Inc. and TIAA-CREF also offer low-fee TDFs.
Schwab’s latest offering comes in addition to three other TDFs that it has available. One is a collective investment trust (CIT) series that is passively managed and available at 8 basis points or 14 basis points. Another has a blend of active and passive management in a CIT format that ranges from 35 basis points to 89 basis points depending on the unit class, and the fourth series is a mutual fund with a blend of active and passive management that ranges from 48 basis points for bond-heavy funds to 82 basis points for funds that invest primarily in equities. (For more, see: The Pros and Cons of Target-Date Funds.)
Focus on Fees
Jake Gilliam, senior multi-asset class portfolio strategist at Charles Schwab Investment Management, told Investment News that, “There is a laser focus on fees” in the TDF industry right now. A report from the consulting firm Callan Associates indicates that portfolio construction is the only factor that is considered more important than fees when it comes to choosing or retaining a target-date fund. Furthermore, the current litigation that is in motion against several major 401(k) and 403(b) plan sponsors has highlighted the importance of cost consideration in retirement plans. (For more, see: Target Date Funds: More Popular, Cheaper Than Ever.)
However, cost is not the only factor that should be taken into account when selecting a TDF. Susan Shoemaker, one of the partners at Plante Moran Financial Advisors, told Investment News that selecting a TDF requires analysis of such features as glide path, the ratio of stocks to bonds in the fund and underlying investment philosophy. “I don't care if something is two basis points. If something is way too aggressive or too conservative for the demographic, I won't use it,” she said.
The Bottom Line
Schwab’s new line of target-date funds is just the latest entry into this fast-growing market. Those who invest in this sector will likely have many more offerings to choose from in the near future. (For more, see: Few Target-Date Managers Invest in Their Own Funds.)